St. LOUIS (ResourceInvestor.com) -- As bullion continues to consolidate around $670/oz, centrals banks within the Central Bank Gold Agreement (CBGA) have frantically quickened the pace of gold sales. Gold bugs debate whether sales will continue at this rate and what this could mean for the market.
Central bank gold activity is the largest supply side component of the market, comprising nearly 13% of global supply via annual sales, excluded gold swapped or loaned in the market.
Some 20 banks represent 90% of gold reserves in the world, although investors still hold the majority of bullion.
In the week ending 27 April 2007, two European central banks consistent with the Central Bank Gold Agreement (CBGA) of 27 September 2004 decreased gold holdings in the amount of EUR 195 million ($265 million), reflecting sales of about 12.3 tonnes.
RI calculates total CBGA gold sales at about 200.3 tonnes, with nearly 89 tonnes sold in the last 7 weeks.
If sales remain at an average of 12.5 tonnes per week for the rest of the year, CBGA signatories will hit their 500-tonne quota.
Matthew Turner, commodities analyst at Virtual Metals, said the recent pick up in sales was due to Spain, which sold 40 tonnes in March alone.
“Spain has been selling quite consistently in the new agreement, though March was by far its largest sale, and perhaps with hindsight might have hit the price in early March,” said Turner.
Whether sales will continue selling at this rate, Turner said most central banks that have sold have tended to reduce their reserves by 50%, “so that would imply only another 100 tonnes or so.”
He said at the end of March, France had sold 69 tonnes thus far this year, with 16 tonnes from the Netherlands, 4 from Sweden and 66 from Spain, making about 155 tonnes in total.
About 40 tonnes more of unknown origin hit the market in April, but “I would image it was mainly France and Spain,” he added.
France will presumably sell another 30 tonnes, and if Spain were to match its sales of 120 tonnes, that would make another 35 tonnes for Spain. The Netherlands still has about 27 tonnes to go in their planned sales. So all in all, this would bring the total for the year to about 300 tonnes.
Turner foresaw only a few scenarios where CBGA could actually hit the 500-tonne quota:
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Another central bank not mentioned makes a large sale (Portugal? Austria? Italy?)
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France sells more than 120 tonnes this year, which will mean less for future years if it sticks to its plans for 600 tonnes.
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Spain sells more than 120 tonnes. If Spain sold 200 tonnes, we would be on about 380.
He said Spain is in a particularly interesting position as it has also dramatically reduced its foreign exchange reserves since 1999 and gold still remains a very high percentage of reserves.
“I can't, though, see 500 tonnes being sold unless there is a new seller,” he concluded.
Both GFMS and CPM Group agreed with this assessment in recent reports of the gold market, with CBGA signatories expected to end the year well under the 500-tonne quota.
Neal R. Ryan, VP and Director of Economic Research at Blanchard & Co., concurred in that the increase in sales is only a temporary phenomenon.
“These increased sales levels are giving investors a great entry point because as last year showed, the sales will abate into the summer months,” said Ryan.
The average weekly sales for the year are still only about 7 tonnes, despite the recent pick up. Even at that rate, sales would end the CBGA year more than 150 tonnes shy of the quota.
“The fact is, these sales have put the market under tremendous pressure, but have not tanked prices as has been the case in the past,” said Ryan.
Dennis Gartman, editor of the Gartman Letter, said central bank gold sales are “causing a good deal of confusion” among analysts, but the market has absorbed the supply fairly well.
“We know only that even as central bank gold sales have been relatively high, gold has taken that selling relatively well,” he added.
However, he said that in the near term gold could trade down to $660-662 “very, very easily over the course of the next several days as the dollar corrects and as late longs are put to the test.”
According to Gartman, a break below $670-671 could touch off a large number of sell stops and drive gold downward “faster than most gold bulls might wish to believe possible, or likely.”
“Call it trader's intuition, or call it what you will, but we'll not argue with those who chose to reduce their exposure, awaiting this correction, which we think now seems somewhat inevitable and already in progress,” he added.
James Moore, analyst at TheBullionDesk.com, also expects further consolidation with support at $670 and technical support pegged at $664/$662.
“While good scaled down support has been found over the past couple of days the scale of speculative longs and lack of traction in response to dollar weakness does suggest further corrections/consolidation in the coming sessions,” he said.
